Wednesday, May 10, 2017

New Zealand holds rate, keeps forecast for rise in Q3 '19

New Zealand's central bank left its benchmark Official Cash Rate (OCR) at 1.75 percent, as expected, and underscored that it intends to keep an accommodative monetary policy stance by confirming that it first expects to raise rates by September 2019.
The Reserve Bank of New Zealand (RBNZ), which adopted a neutral policy stance in November 2016, also reiterated its guidance from March that monetary policy will "remain accommodative for a considerable period" as there are numerous uncertainties - specifically "extensive political uncertainty" - that could require an adjustment to policy.
The only substantial change to its policy statement concerns the exchange rate of the New Zealand dollar - known as the kiwi - which has depreciated in the last eight months following a rise in the previous 12 months.
RBNZ Governor Graeme Wheeler welcomed the recent fall in the kiwi, saying this was "encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector."
This is a sharp shift in tone from February, when Wheeler said a "decline in the exchange rate is needed," and in March when he said "further depreciation is needed to achieve more balanced growth."
The New Zealand dollar was trading at 1.47 to the U.S. dollar today, down 2 percent since the start of this year. On a trade-weighted basis, the kiwi is down around 5 percent since February.
In an update to its monetary policy forecast, the central bank forecast OCR would remain at the current level until September 2019 when it then would rise to 1.9 percent and be raised to 2.0 percent by March 2020 and remain at that level until the end of the forecast horizon in June 2020.
This forecast is unchanged from the previous forecast from February.
But the RBNZ also acknowledged that inflation is starting to pick up, with the inflation rate seen at 2.1 percent in June and September this year before easing to 1.7 percent in December.
The rise in inflation - it rose to 2.2 percent in the first quarter of this year from 1.3 percent in the previous quarter - was seen as temporary due to higher petrol and food prices.
In its previous forecast, inflation was seen at 1.5 percent in March and June, then 1.7 percent in September and 1.3 percent in December this year.
"Non-tradables and wage inflation remain moderate but are expected to increase gradually," Wheeler said in a statement, adding this would help bring inflation to the midpoint of the central bank's target band of 1-3 percent in the medium term.
During 2018 inflation is seen consistently below the central bank's 2.0 percent target before rising to that level in June 2019 and then remaining at 2.0 percent or slightly above through June 2020.
Wheeler also said New Zealand's economic growth in the second half of last year was weaker than expected but the outlook remains positive on continued accommodative monetary policy, strong population growth and high levels of household spending and construction activity.
In the fourth quarter of last year New Zealand's Gross Domestic Product eased to an annual rate of 2.7 percent from 3.3 percent in the third quarter.
Looking at the 12 months from March, the RBNZ forecast 2.9 percent growth in 2017, down from 3.7 percent forecast in February. For 2018 the forecast was raised to 3.7 percent from 3.5 percent and the 2019 forest to 3.1 percent from 2.6 percent. For 2010 growth is seen at an unchanged 2.1 percent.

The Reserve Bank of New Zealand released the following statement by its governor, Graeme Wheeler:

"The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

Global economic growth has increased and become more broad-based over recent months. However, major challenges remain with on-going surplus capacity and extensive political uncertainty.

Stronger global demand has helped to raise commodity prices over the past year, which has led to some increase in headline inflation across New Zealand’s trading partners. However, the level of core inflation has generally remained low. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has fallen by around 5 percent since February, partly in response to global developments and reduced interest rate differentials. This is encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.

GDP growth in the second half of 2016 was weaker than expected. Nevertheless, the growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity.

House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand.

The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices. These effects are temporary and may lead to some variability in headline inflation over the year ahead. Non-tradables and wage inflation remain moderate but are expected to increase gradually. This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly."